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Pierre Gurdjian, Andr Andonian, McKinsey &Company Presentation on Armenia 2020 Conference Yerevan, October 25, 2003
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Armenia2020_presentation_Yerevan
ARMENIA'S ECONOMY HAS RECENTLY GROWN AT HIGH RATES, HOWEVER IT STILL REMAINS WEAK BOTH IN ABSOLUTE AND RELATIVE TERMS
US A German y China India Russia Turkey Israe l Iran Singapor e Romani a Sloveni
PPP GDP per capita Real GDP CAGR Nominal GDP 2002, USD 1999 - 2002, percent 2002, USD billions 10,445.0 2.14 36,146
1,989.0 1,237.0 5,540 3,135 6,114 6,800 1.38 1.78 4.07 27,361 3,730 17,225 12,130 2,924 2,900 3,200 3,850 3.58 9.11 4.19
1
24,317
1.35
7.72
4.70 6.03
514.0
349.0 182.0 102.0 91.0 88.0 45,0 21.0 6.3
16,724
5,608
3.4 2.4
8,280
Armenia2020_presentation_Yerevan
ARMENIA'S RECENT ECONOMIC GROWTH WAS LARGELY DRIVEN BY CONSTRUCTION AND RETAIL, FUELLED BY EXTERNAL FINANCING
Real CAGR Percent
USD millions
2,117 1,899 1,847 1,911
2,367
379 237
547 485 170 599
160 162
586 410
97
174 164
469 398 138 503 442
209 176
430 421 133 543 452
227 209
530 429 159 567 392
3.6 7.3
5.3 7.8
483 445
348
1998
1999
2000
2001
2002
23.4
23.9
23.6
18.5
14.7
* Without FDI, includes remittance, grants, concessionary lending and limited capital transfers Source: McKinsey
Armenia2020_presentation_Yerevan
ARMENIAN EXPORT HAS GROWN SIGNIFICANTLY TOO, ALTHOUGH FROM VERY LOW STARTING LEVEL AND ON A NARROW BASE
USD millions
294 Total exports Precious stones and articles* Food products Textile and apparel Real CAGR Percent 12.6
247
46
59 29 45 44 56
15 2002 12.9 84.5
60.1
34.6 16.0 3.0 7.0 3.4 -6.9
16
197 183 7 161 8
51 27 43 41 41 28
2001 11.7 63.0
18 16 40 33 49
13
18 16 25 40
30 16 44 41 36 22 2000
10.3 43.7
20 1998
9.6 41.1
23 26
1999 8.7 36.7
Base metals Mineral and chemical products Machinery & equipment Other
* On a net basis, given that the industry performs only intermediate processing Source: IMF,Armenia National Statistics Service, 2002
Armenia2020_presentation_Yerevan
"Singapore" model
"Ireland" model
"Israel" model
"Paraguay" model
Integration to more
developed EU Consistent economic liberalization Relatively cheaper, but productive labor Strong driving role of the private sector Investment in education Democracy and civil development parallel to economy
Highly educated
workforce Large Diaspora and foreign assistance Investment in education and science, but Chronic hostility with neighbors High rates of immigration, requiring extensive resources for job creation
Exploration of
hydro energy resources Centralized (dictatorial) state Highly informal economy and weak rule of law Cheap labor and high reproductive rates
Source: McKinsey
Armenia2020_presentation_Yerevan
ARMENIA'S PROSPERITY LEVEL IN 2020 WILL STRONGLY DEPEND ON ITS CURRENT CHOICES
PPP GDP per capita/USD
15
12,560
6,1 Singapore model: Armenia becomes an integration champion and business hub for the region % Real growth CAGR, 2002-2022
10,340
10
8,340 6,600 5,040 5 4,460 2,690 3,850 6,900 7,920
Ireland model: Armenia 9,270 consistently integrates with European structures, attracts increasing foreign investment 4,5 Israel model: Armenia relies 6,410 mainly on Russia, sees slow growth of traditional sectors and 2,6 little foreign investment
4,860
5,260
5,300
5,090
4,690
0,1 Paraguay model: Regional and internal instability stalls growth, some traditional sectors decline due to increasing competition
2,120
1990 1994 1998 2002 2006 2010 2014 2018 2022
Source: McKinsey
Armenia2020_presentation_Yerevan
THE WELL-BEING OF ORDINARY ARMENIAN CITIZENS WILL VARY EVEN MORE PRONOUNCEDLY DEPENDING ON THE CHOSEN PATH
Average nominal monthly salary,USD
600
460
Singapore model: Becoming masters of own life Average Armenians afford modern housing conditions Armenia becomes predominantly middle class society Quality of education is among the best in the world Armenians return massively from Russia Ireland model: Living like in Eastern Europe Average Armenians afford buying furniture and cheap cars Large middle class emerges, both in foreign and local companies Quality of education moves towards European standards Emigration is reversed Israel model: Living like in a backward Russian province Average Armenians work in small factories and shops Some middle class emerges, mainly in Russian-owned industries Quality of education like in Soviet times Best and brightest still emigrate Paraguay model: No change for better Average people barely make their basic ends Unemployment is pervasive, especially in rural areas Quality of education deteriorates Population emigrates massively
400
260
200
120 100 60 50
45
2002
Source: McKinsey
2020
Armenia2020_presentation_Yerevan
ACHIEVING THE AMBITIOUS GROWTH TARGETS WILL BE POSSIBLE THROUGH IMPROVING PRODUCTIVITY* OF ARMENIAN COMPANIES
Labor productivity of Armenia's economic agents will be the main engine for wealth generation
Surplus distributed
Impact on economy
Growth in
company x
Higher value
added Lower labor/ capital expenses
Customers
(lower prices) Employees (higher salaries) Owners (higher profits)
Higher demand
Lower prices Higher salaries Net jobs created Higher investments Higher profits Higher demand Higher exports Lower unit costs Innovative products
7
* Productivity is defined as total value added divided by number of employees participating in value creation Source: McKinsey
Armenia2020_presentation_Yerevan
Macro-political economic
instability
Poor micro-economic
policies Unequal enforcement of micro-economic policies
By far the most important barriers to higher economic growth in all studied countries
Armenia2020_presentation_Yerevan
WHILE ACHIEVING SIGNIFICANTLY HIGHER PRODUCTIVITY WILL BE POSSIBLE THROUGH FOCUSED INITIATIVES IN PRIORITY SECTORS
2003-2010
High (>10% CAGR)
Real productivity growth potential* 12 9 8 13 3 15 1 11 5 9 10 16 7 5 6 Construction Banking and insurance Food processing Textile and apparel Industrial machinery 6 1 2 3 Mining Metals Telecom Tourism and restaurants
14
7
8
10 Electronics and precision 11 Construction materials Low (0-5% CAGR) 12 Health care 13 Retail and wholesale
Sector Employment growth potential* * Compared to current employment/productivity in the sector Source: Team analysis; World Bank; UNDP
Armenia2020_presentation_Yerevan
WHILE ACHIEVING SIGNIFICANTLY HIGHER PRODUCTIVITY WILL BE POSSIBLE THROUGH FOCUSED INITIATIVES IN PRIORITY SECTORS
Sectors with highest total growth potential
2003-2010
High (>10% CAGR)
Real productivity growth potential* 12 9 8 13 3 15 1 11 5 10 16 7 6
1 2 3
Mining Metals Telecom Tourism and restaurants Construction Banking and insurance Food processing Textile and apparel Industrial machinery
4
5 6
14
7
8 9
10 Electronics and precision 11 Construction materials Low (0-5% CAGR) 12 Health care 13 Retail and wholesale
Sector Employment growth potential* * Compared to current employment/productivity in the sector Source: Team analysis; World Bank; UNDP
Armenia2020_presentation_Yerevan
8.62
3,99
Software and IT Services sector plays important role in Armenia's economy
2,20 1,38
2,00 1,71
0,53 0,11
US Germany Ireland Israel India Russia Estonia
CIS countries
0,09
Armenia Georgia
0,22
Iran
Neighbor countries
0,01
Turkey
Western Countries
* GDP 2002 data consistently from Global Insight Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, ANCI, ASIROS, Bilisim, Datamonitor, Sanaray, Global Insight
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Armenia2020_presentation_Yerevan
ARMENIA IS ALREADY AT A GOOD STARTING POINT FOR GROWTH IN SOFTWARE AND IT SERVICES AS PRIORITY SECTOR
Productivity PPP - Percent of US level
180 172
100
90
Armenia with good performance given quite young and rather fragmented sector
44 38 23
* MGI values: Germany scaled with GDP PPP = 2.06, India and Russia from in-depth MGI studies ** Ireland scaled with GDP PPP = 0.84; Israel playing equally on global market with US PPP=1, Armenia: Exports at PPP = 1.5, domestic at PPP = 5.6 Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, Datamonitor, Global Insight, MGI
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Armenia2020_presentation_Yerevan
BOTH FOREIGN SUBSIDIARIES AND DOMESTIC COMPANIES ALREADY REACH GLOBALLY COMPETITIVE LEVELS OF PRODUCTIVITY
ESTIMATES
Foreign owned companies Only comparison of programming productivity possible (at PPP) (further value creation steps executed abroad) 40 12 20 8 Armenia Tax, programming admin productivity and regulatory issues* 50% value proportional to salary difference Process US manageprogramming ment** productivity and staff qualification
40% 60%
100 15
Armenia Tax, Process programming admin manageproductivity and ment** regulatory and staff issues* qualification
* ** *** Source: Including Armentel monopoly Scarcity of experienced group leaders (project management skills) Little incentive for value maximization due to predominantly one-person-ownership structure McKinsey, Company interviews
Armenia Product product mix (small generation domestic and market) marketing/ sales productivity
Strategic Branding US total manage- discount productivity ment (including ownership issues***)
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Armenia2020_presentation_Yerevan
LEARNING FROM SUCCESSFUL COUNTRIES IN SOFTWARE AND IT SERVICES SHOWS FOUR COMMON KEY FACTORS FOR GROWTH
India Ireland Israel
Offshored business
processes
Security software
funding and support mechanisms for new companies High spending on R&D and education 14
Armenia2020_presentation_Yerevan
TWO TARGET SEGMENTS HAVE BEEN IDENTIFIED AS MOST PROMISING IN THE GLOBAL EXPORT MARKET
IT services 1 2 High 3 4 5 18 20 Attractiveness of industry segment Global market size Market growth rate Industry profitability 2/10 16 9 8 3 7 17 21 15 4 1 11 5 19 12 6 22 6 7 8 9 13 10 11 12 13 14 15 Low Low Armenia's ability to be a significant player (scale indicates "absolute" ability) Technical skills Customer relationship/marketing skills Market concentration (only Packaged Software) Language skills High 16 17 18 19 20 21 IT consulting
Systems integration Networking consulting and integration Customized applications development IT education and training Software support and implementation Hardware support and implementation IT outsourcing Network infrastructure management services
14
Processing services
Applications outsourcing Business Process Outsourcing (BPO) Vertical business applications Cross industry business applications Consumer applications Information and data management Application design and construction tools Network management and security Systems management Operating systems Middleware and serverware Embedded software
(Packaged) software
22
15
Armenia2020_presentation_Yerevan
Systems integration Networking consulting and integration Customized applications development IT education and training Software support and implementation Hardware support and implementation IT outsourcing Network infrastructure management services
14
Processing services
Applications outsourcing Business Process Outsourcing (BPO) Vertical business applications Cross industry business applications Consumer applications Information and data management Application design and construction tools Network management and security Systems management Operating systems Middleware and serverware Embedded software
(Packaged) software
22
16
Armenia2020_presentation_Yerevan
A FOCUSED GROWTH STRATEGY COULD LEAD TO REVENUE GROWTH BY THE FACTOR OF 15 BY 2020
High growth - 3I Revenues USD millions
238 40 40
8,9 5,6 1,7 1,7 2,9 3,9 1,7 1,9 1,9
Medium growth
618 103 184
Slow growth
40
64
78
Employees Thousands
2,6
6,2
0,20
0,41
0,54 0,20
0,30
0,35
0,20
0,28
0,34
2002 2010 2020 2002 2010 2020 Comments* Average annual employee Average annual employee increase* of ~ 450 difficult increase* of ~ 230 possible to achieve (based on about 500 to achieve, seems balanced computer science graduates with IT specialists required in annually**, partly working as IT other sectors of economy specialists in other sectors) * Over next 8 years (higher growth phase) ** About 500 computer science graduates annually, assumed from current base of 400 Source: McKinsey
2002 2010 2020 Average annual employee increase* of ~ 200 could underutilize pool of IT specialist graduates
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Armenia2020_presentation_Yerevan
THE STRATEGY FOR SOFTWARE AND IT SERVICES SHOULD CENTER AROUND SIX KEY ELEMENTS REQUIRED FOR LONG-TERM SUCCESS
1 Government to continue and constantly coordinate education programs for all educational levels
3 Actively attract key global player to position Armenia on global IT map 4 Set up dedicated agency to support domestic companies towards international markets
6 Domestic companies to more actively pursue domestic and export expansion options
Source: McKinsey
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Armenia2020_presentation_Yerevan